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Wise Counsel

Normally, when people make investment choices preparing for retirement, they tend to look at their monthly bank and financial statements and the value of their home. However, what most don't do is assess the value of their "human capital," the amount that a person can amass as a wage earner over the course of his or her working life. For years, Moshe Milevsky, a professor at York University in Canada, has helped investors save safely for retirement. In his new book, Are You a Stock or Bond?, Milevsky details the many factors beyond income statements that should be taken into consideration when preparing for retirement. This is the "human capital," the job, marital status, health and home that should all be considered when investing for the future. As you age, you convert human capital info financial capital, writes Milevsky. "Your total capital, which is the sum of both types of capital, should be increasing over time."

Depending on how risky your job is, you should consider your human capital as a stock or as a bond, or some combination thereof. For instance, Milevsky considers himself a bond. As a tenured professor, he has high job security, a dependable salary and a compensation plan and pension plan. So he invests in potentially volatile stocks vs. dependable bonds, because he can afford the risk. Conversely, if a person has a higher risk position, one with little security and volatility, that person would want to invest more in bonds. "Your human capital can be viewed as a hedge against losses in your financial capital," writes Milevsky. Age comes into play as well. "As a 50-, 40-, or especially 30-year old, you should be willing to take more chances with your total portfolio, perhaps even borrow to invest or leverage into the stock market, because you have the ability to mine more human capital if needed."

Are You a Stock or Bond? examines the impact of longevity, noting it's both a blessing and a risk. Milevsky provides actuarial probability tables that show that basic life expectancy numbers (73.6 for males and 79.2 for females) are deceiving and result in under-saving and underestimates of retirement income needs. He shows that for a 65-year old male, there is a greater than 45 percent chance that he will live to the age of 85. "That would require 20 years of retirement income, if you decide to retire exactly at the age of 65." Likewise, a 65-year-old woman has a 35 percent chance to live to 90. "Personal longevity is a risk-management issue. You must have a strategy in place," writes Milevsky.

Milevsky dispels one of the general rules in retirement saving: that the percentage of your portfolio that should be invested in the stock market is 100 minus your age. "So if you're 70 years old, you should have 30 percent in the stock market, by 80 you should have 20 percent, and so on," he writes. Instead, he offers a formula that determines if a retiree's spending plan/rate is sustainable given the risk and reward projection for a retirement portfolio at a given age. Overall, his formula shows that retirees should be more aggressive in their investing. "I think retirees should have a substantial exposure to equity-based investments at the very least to beat their personal inflation rate," he writes.

Milevsky encourages readers to allocate a portion of retirement funds to some sort of annuity in order to protect against various retirement risks. He emphasizes the importance of asset allocation. "If you allocate too much of your retirement nest egg to any one asset class, economic sector or industry, you are setting yourself up for disappointment...In the retirement income phase, however, product allocation will become even more important."

Are You a Stock or Bond? is filled with charts, graphs and other data that support Milevsky's argument. His advice is sound and particularly vital given the decline in defined pension plans and job stability. It's a book both you and your clients will value.

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Mary Scott is the co-author of Companies with a Conscience and can be reached at maryscott303@comcast.net.